Rental Declines Expected To Gather Pace In The East Of England

Tenant demand across all sectors (Office, Retail and Industrial) continued to fall in the first quarter although the pace of decline eased in the East of England. The region’s Chartered Surveyors expect rental declines to accelerate on the back of a record increase in available floor space according to the latest RICS’ Commercial Property Survey published today (5 May 2009).

The net balance of East of England Chartered Surveyors reported a rise in available commercial floor space. In the office sector 62 per cent more regional Surveyors reported a rise than a fall in available floor space up from 57 per cent in the last quarter. In the retail sector 89 per cent more surveyors reported a rise than a fall up from 83 per cent last quarter.

However, in the industrial sector the rate of increase eased back slightly with 75 per cent of surveyors reporting an increase rather than a decline, compared to 78 per cent last quarter. Nationally, available commercial floor space has risen at the fastest pace in the survey’s history.

The ongoing contraction in the economy and the continuing rise in available floor space have weighed on surveyor expectations for the rental outlook. East of England surveyors are now more pessimistic than ever before in all sectors, with 75 per cent of surveyors expecting a fall than rise in office rents; 78 per cent expecting a fall than a rise in retail rents; and 62 per cent expecting a fall than a rise in industrial rents.

The value of inducements (a lead indicator of future rental trends) rose at the fastest pace in the survey’s history as landlords continued to try to boost demand with incentives.

Occupier demand for commercial floorspace, in all three sectors, has improved in the East of England this past quarter, although the majority of surveyors are still reporting a decline than a rise in demand.

In the office sector 12 per cent more surveyors reported a fall than a rise in occupier demand, compared to 100 per cent reporting a fall last quarter. In the retail sector 12 per cent more chartered surveyors reported a fall than a rise in demand, compared to last quarter’s 83 per cent. Demand improved the most in the region’s industrial sector, where surveyors felt there had been neither a decline or a rise in demand this quarter, which was in marked contrast to last quarter when 78 per cent more surveyors reported a fall than a rise in demand. This improvement offers some hope that the dramatic easing in monetary policy and fiscal stimulus measures are providing some support to the commercial property market by lifting business confidence. The immediate outlook for lettings activity remains poor as the net balance of surveyors reporting new occupier enquiries remained in negative territory. However, nationally, 38 percent more Chartered Surveyors reported a fall than a rise in new enquires for business space compared to 63 percent in the last quarter – the least negative reading in a year.

David Potter, RICS East operations director, said: “Whilst indicators have moved off historic lows, the reality is that fundamentals in the occupier market continue to deteriorate as companies remain in consolidation mode. Landlords are ramping up inducements as they attempt to secure a letting with sharply rising available space exerting greater downward pressure on rents.

“The investment market continues to see declines in transaction activity although at the slowest pace since the onset of the downturn. Whilst it is still too soon to point to an end in price falls, deal activity should be picking up by the end of the year as those with deep pockets move in.

“Given the gloomy backdrop for the sector and expectation of further rises in vacant space, RICS is disappointed that the government failed to address the issue of empty property rates in the recent budget. This is encouraging the demolition of perfectly good buildings, discouraging speculative development and could result in more far reaching problems when the economy starts to pick-up again.”

Anthony Barker BSc FRICS, of Barker Storey Matthews in Peterborough, said: “There is an ever increasing amount of space coming onto the market, and there are reducing numbers of potential occupiers. However, the remaining requirements are genuine and as a result deals are still being done. Landlords are having to be competitive in terms of shorter leases and rent free periods but most are accepting it with good grace.”